EUR/GBP near key support

Dollar rally slows as US equities sell off

On Thursday dollar strength was still the name of the game early in the session. The gains were more significant against the euro than against the yen or even against sterling. It was mostly follow-through price action as there were few eco data in the EMU. The US data were close to expectation and didn’t inspire further USD gains. Later in the session, the dollar returned part of the early gains as a steep sell-off of US equities pushed core bond yields lower. Even so, the (trade-weighted) dollar is still near the recent highs, north of the 85 mark.

Overnight, Asian equity indices are in the red, but the losses are moderate given the sell-off in the US yesterday. The Japanese CPI was close to expectations. The core inflation was slightly below consensus at 3.1% J/J. This suggests that it remains difficult for the BoJ to meet its inflation target in a sustainable way. The debate on more BOJ easing stays open. USD/JPY slightly underperformed the USD rally of late. However, the pair weathers the storm on the US equity markets quite well. USD/JPY is near the 109 area. EUR/USD reversed part of the early losses late yesterday and is holding in the mid 1.27 area overnight. The likes of the Aussie and the kiwi dollar are losing further ground against the USD. Later today, there are few important eco data in the EMU. In the US, the calendar is also only moderately interesting with the revision of the Q2 GDP and the final consumer confidence from the University of Michigan. The Q2 GDP revision is a bit of old news and has usually no big impact on markets anymore. Even so, an upward revision from 4.2% to 4.6% is expected and we see upside risks. A revision to 5% annualised US growth might still get some media attention and might be a slightly positive for the dollar. The consensus expects the Michigan confidence slightly higher too.

Developments on global equity markets are a factor of importance for trading on other markets including the currency market. It is not easy to see one single factor for yesterday’s correction in the US (Apple?, geopolitical issues?, or maybe even the impact of a higher dollar on US earnings?). A risk off sentiment via lower bond yields tends to slow the USD rally, but for now the impact is limited. We look out how this trading logic will turn out further down the road. For now we maintain a USD positive bias even as some short-term turbulence in the likes of USD/JPY and EUR/USD is well possible.

From a technical point of view, USD/JPY last week extended its rally after the break of the key 105.44 resistance. The Fed statement was balanced, but the rate projections suggest that the dollar might get additional interest rate support. At the same time, the yen remained in the defensive as markets saw a decent chance of more BOJ easing down the road. The pair set a correction high at 109.46 on Friday morning, but ran into resistance. 110.66 is still the next important target. We have a positive bias on USD/JPY. At the end of last week, we indicated that the pair was moving well into overbought territory and urged caution. It is too early to call a real trend reversal, but in the short-term some consolidation/ correction might be on the cards. So, the 110 barrier and the 110.66 resistance might be tough to overcome short-term.

The technical picture of EUR/USD deteriorated further after the break below the key 1.3105 level (Sept 2013 low). This level is now the new resistance that will be difficult to regain. The negative deposit rate is a structural negative for the euro. The Fed communication was mixed, but the difference in policy bias and projections of higher official interest rates keep the dollar well bid. The EUR/USD downtrend remains in place and the test of the key 1.2755/1.2662 support area has started. A sustained break and a new EUR/USD downleg below this level won’t be easy on a first attempt. Evens so, the trend remains in place. A more pronounced correction (EUR/USD rebound) remains an opportunity to add to EUR/USD short exposure.

EUR/GBP near key support

On Thursday, GBP-trading was primarily driven by technical considerations and by the price action in the major USD cross rates. Both cable and EUR/USD came under pressure from dollar strength early in the session, but the decline in cable was less pronounced and it halted sooner. So, EUR/GBP spiked briefly below the 0.78 area. A second test of the downside occurred on headlines from BoE’s Carney as he said that the point at which interest rates start to rise is getting closer. However once again EUR/GBP could not drop sustained below 0.78, as EUR/USD profited more than cable from the USD setback, later in the session. EUR/GBP closed the session at 0.7814, only marginally lower from the 0.7821 close on Wednesday.

Overnight EUR/GBP is little changed. The Hometrack housing survey stabilized M/M and slowed from 5.5% Y/Y to 5.0%. This suggests a cooling in house prices. This might be a slight negative for sterling when UK traders join the action.

Later today, the UK calendar is again empty. Over the previous days, sterling showed some volatile intraday swings. There is no clear trend, but underlying sentiment on sterling was not that bad, especially not against the euro. In a day-to-day perspective, we might see some consolidation in EUR/GBP as the nearing of the key 0.7755 support might inspire some profit taking in EUR/GBP shorts.

Further down the road, the focus for sterling trading should return to the economic fundamentals and to the guidance from the BoE on policy normalization. After the recent rebound of sterling and the soft comments from the BoE minutes, investors are pondering the chances for further sterling gains. This wait-and-see behavior might still take some time as there are few really important UK eco data on the agenda this week.